Malaysia’s Prime Minister Mahathir Mohamad has refused to back away from criticism of New Delhi’s Kashmir policy at the UN General Assembly, daring a trade war that could have serious implications for his country’s economy.

In a September 28 speech to the United Nations, the 94-year-old Mahathir accused India of having "invaded and occupied" the disputed Jammu & Kashmir region.

Mahathir’s criticism has triggered an informal boycott of Malaysian palm oil, compounded by his refusal to extradite an Islamic preacher, Zakir Naik, who has stirred controversy in both countries by his incendiary speeches. That is no light undertaking. India was Malaysia's third-largest export destination in 2018 for palm oil and palm-based products, amounting to RMB6.84 billion (US$1.63 billion). Malaysia's exports to India totaled US$10.8bn, while imports totaled $6.4bn, according to Indian government data.

Naik, a 53-year-old radical television preacher, fled India ahead of arrest in 2016 and subsequently moved to the largely Muslim Malaysia, where he was granted permanent residency—and protection by Mahathir despite general disapproval in Kuala Lumpur of his inflammatory pro-Muslim rheoric. Naik’s racially divisive remarks have created much heartburn in both countries. He is wanted by Indian authorities since 2016 for alleged money laundering and inciting extremism through hate speeches.

Compounded by the refusal to allow for the extradition of Naik, Mahathir’s remarks over Kashmir were called “highly regrettable” by Indian Foreign Ministry spokesperson Raveesh Kumar although he called attention to what he called traditionally cordial ties. "We deeply regret these comments as they are not based on facts," he added.

Kashmir, a disputed Muslim-dominated region also claimed by Pakistan, has become a tinder box for the incumbent Narendra Modi government ever since it revoked its special status in August and imposed a communications blockade that has only partially been lifted. However, New Delhi regards the Kashmir issue as an “internal matter” and is quick to snub countries that comment.

The diplomatic fallout from Malaysia’s criticism over Kashmir has gradually spread to the economy, with Indian traders shunning Malaysian palm oil suppliers in favor of Indonesian alternatives. India’s top vegetable oil trade body – Mumbai-based Solvent Extractors’ Association of India – has asked its members to stop buying Malaysian palm oil.

“In your own interest as well as a mark of solidarity with our nation, we should avoid purchases from Malaysia for the time being. We trust you would heed our advice,” a statement issued by SEAI said. Traders also said they were not entering into new contracts.

“There is uncertainty among traders and as a precaution, we have told them not to go for new contracts till there is clarity,” B V Mehta, executive director of SEA told the media adding that the decision was in national interest.

Smaller trade associations and nationalists have added to the tension by waging a #BoycottMalaysia campaign on social media calling for a boycott of tourism and goods from the Muslim-majority country. Several suggested that the government raise import taxes. Meanwhile, Malaysian Twitter users hit back with their own #Boycott India offensive.

With Malaysia seeking peace overtures, insiders say specific measures are underway to disincentivize India’s import of palmolein from Malaysia. As the world’s largest palmolein importer, India sourced US$900 million worth of the oil in the first six months of this year alone as the second largest buyer of palmolein from Malaysia.

Despite the diplomatic and commercial ramifications a defiant Mahathir stood by his remarks on Kashmir, stating that he believes in "speaking his mind."

“We felt that the people of Kashmir had benefited from the resolution of the United Nations, and all we are saying is that we should all abide, not just India and Pakistan, but even the United States of America and other countries. We speak out our mind, we don't retract and change, " Mahathir said at a media event.

He added that Malaysia would study the impact of the boycott called by the Mumbai-based Solvent Extractors’ Association of India and look at ways to address the issue. "This is not the Indian government, so we have to find out how we can communicate with these people, because trade is a two-way thing and it is bad to have what amounts to a trade war," Mahathir said.

New Delhi has so far refused to comment but analysts say Mahathir’s Kashmir comments may cost Kuala Lumpur, as the economic gains derived from bilateral trade with India can bolster Malaysia’s domestic economy. This is in turn would benefit the political legitimacy of Mahathir’s government based on its economic performance.

Political mileage can also be gained in garnering support from the sizeable Indian community in Malaysia, especially during election time.

Apart from robust trade, India and Malaysia are also natural political and strategic allies. Both are also engaged in final negotiations for the China-led Regional Comprehensive Economic Partnership agreement, which aims to create a trading bloc of 16 nations by the year’s end.

The Economic Times reported that over 150 Indian companies, including 61 joint ventures, operate in Malaysia. Even on the defense front, Indian Air Force have trained Malaysian pilots on the Sukhoi SU-30 fighters. Both countries have also institutionalized a defense secretary-level dialogue.

Over the years, New Delhi has worked to deepen its ties with Malaysia under its Look East Policy. Former Prime Minister Manmohan Singh signed a strategic partnership with Malaysia in 2010, which PM Narendra Modi upgraded into an ‘Enhanced Strategic Partnership’ in 2015.

In 2018, Najib Razak, the then Malaysian PM, was among the ASEAN heads of state and government who were chief guests at the Republic Day parade. In a goodwill gesture, Modi also took a detour to drop by in Malaysia on May 31 last year just to felicitate the then newly elected PM Mahathir Mohamad.

Good relations notwithstanding, there’s little scope for complacency in bilateral relations. Malaysia faces stiff competition from rival Indonesia from which India already buys most of its oil. “India has a ready partner in Indonesia which already supplies much of our edible oil,” says Mumbai-based oil trader Prakash Kamath. “If the Malaysians act up, we have a Plan B in Indonesia. However, the same cannot be said for Malaysia.”

Ties between India and Indonesia have strengthened this year with Prime Minister Narendra Modi and President Joko Widodo exchanging visits and both sides committing to double trade to US$50 billion in 2025.